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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

April 28, 2006

FEDERAL ISSUES

BankAtlantic Consents to $10 Million Penalty for Bank Secrecy Act Violations. The Financial Crimes Enforcement Network (FinCEN) and the Office of Thrift Supervision (OTS) have announced the assessment of a $10 million civil monetary penalty against BankAtlantic -- a thrift based in Fort Lauderdale, Florida with $6 billion in assets -- for violations of Bank Secrecy Act (BSA) regulations. The alleged core violations appear to consist of significant deficiencies in the establishment and internal review of the bank's anti-money laundering program, including inadequate systems for monitoring wire transfer activities, a complete lack of procedures for reviewing accounts subject to subpoena, a lack of adequate controls on the bank's client portfolio of high income, high net-worth persons, inadequate internal review of policies and procedures, and inadequate training of employees. As a result of these core violations, the bank allegedly failed to timely file a "substantial number" of suspicious activity reports. In addition to paying the penalty, the bank is now under a cease-and-desist order requiring it to make all changes necessary to ensure the adequacy of its BSA compliance programs. For more information, see http://www.fincen.gov/bankatlantic_assessment.pdf and http://www.ots.treas.gov/docs/4/480236.pdf.

GAO Releases Report Assessing Feasibility of Customized Minimum Payment Disclosures for Credit Card Holders. The Government Accountability Office (GAO) issued a report this week addressing the feasibility of requiring credit card issuers to provide cardholders with customized minimum payment disclosures. The report was drafted in response to a request by members of the Senate Committee on Banking, Housing and Urban Affairs to study the feasibility of the customized disclosures, in contrast to the more generic disclosures required by Section 1301 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The GAO concluded in the report that card issuers and processors are likely capable of providing the customized information, but at increased costs (ranging from $9m to $57m estimated), and only with inherent assumptions in necessary calculations. The GAO also concluded that cardholders generally found the customized disclosures to be useful. However, the question of whether such disclosures would ultimately alter repayment behavior received disparate responses. The report also described alternatives to the customized disclosure requirements suggested by issuers, consumer groups and cardholders. For a copy of the report, see http://www.gao.gov/docsearch/repandtest.html.

Freddie Mac Issues eMortgage Timeline. Freddie Mac recently published the Single Family eMortgage Timeline – The Benefits of eMortgages and Next Steps for Adoption (eMortgage Timeline). The eMortgage Timeline outlines Freddie Mac’s “view for the potential of eMortgages” and the next steps for broad marketplace acceptance of eMortgages. The eMortgage Timeline discusses Freddie Mac’s role in developing and validating uniform and accessible industry eMortgage standards, summarizes some of the benefits of eMortgage adoption and lists some of the tasks that must be completed to realize significant eMortgage usage. For more information, see the InfoBytes Special Alert http://www.buckleykolar.com/publications/InfoBytesSpecialAlert042806.html issued earlier today or see http://www.freddiemac.com/singlefamily/elm/pdf/emortgage_whitepaper.pdf.

OCC Issues Guidance on Filing Notices of Proposed Class Action Settlements. On April 21, 2006, the Office of the Comptroller of the Currency (OCC) issued guidance to national banks, their operating subsidiaries, and federal branches and agencies on notifying the OCC of proposed class action settlements involving activities regulated or supervised by the OCC as required by the Class Action Fairness Act of 2005 (28 USC 1711 et seq.). The notice must include eight specified items and should be sent to the institution’s supervisory office and to the Director of the OCC’s Litigation Division within 10 days of filing the proposed settlement with the court. A class member may refuse to comply with and may choose not to be bound by a settlement agreement or consent decree in a class action if the class member demonstrates that the notice required under 28 USC 1715 has not been provided. For more information, see http://www.occ.treas.gov/ftp/bulletin/2006-20.doc.

OCC Newsletter Focuses on Strategies to Reduce Foreclosures. The OCC announced the availability of the current issue of its online newsletter Community Developments, which focuses on “what happens when non-traditional and other borrowers get into trouble with their loans.” The newsletter is available at http://www.occ.treas.gov/cdd/spring06b/cd/index.html.

HUD To Sell Homes to Disaster Victims At Discount. On April 24, 2006, the Department of Housing and Urban Development (HUD) announced that it will sell HUD-owned homes to hurricane evacuees at 90% of the home’s appraised value. Following last year’s hurricanes, HUD provided interim rental housing to disaster victims in HUD-owned properties in the states of South Carolina, Florida, Kentucky, Georgia, Tennessee, Arkansas, Oklahoma and Texas. These individuals will be given the opportunity to purchase the homes they reside in at 90% of the appraised value. In addition, HUD is establishing a nationwide sales initiative that will provide discounts and preferences for hurricane evacuees seeking housing in any of the 50 states. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-046.cfm.

STATE ISSUES

Kentucky Passes Law Modifying Exemptions to Mortgage Loan Companies and Loan Brokers Act. On April 21, 2006, Kentucky’s Governor signed HB 462 into law, which, among other things, amends the Kentucky Mortgage Loan Companies and Loan Brokers Act, Ky. Rev. Stat. Ann. § 294.010 et seq. (the Act), by (i) limiting the exemptions to the Act previously available to state-licensed consumer loan or finance companies and industrial loan companies, and (ii) limiting the corporate exemption to licensing under the Act previously available to HUD-approved mortgagees. See id. § 294.020. Prior to this change, a consumer loan or finance company or industrial loan company licensed under the laws of any state was recognized to be exempt from the Act. HB 462 limits this exemption, providing that “[a] consumer loan or finance company or an industrial loan company licensed under KRS Chapter 288 or 291 whose primary business is originating consumer or industrial loans as provided under KRS Chapter 288 or 291, or any wholly owned subsidiary or affiliate of such a consumer loan or finance company or an industrial loan company, or any mortgage loan broker, loan officer, originator, or loan processor employed by any such person, or by a wholly owned subsidiary or affiliate of any such consumer loan or finance company or an industrial loan company” is exempt from licensure, but is subject to other “prohibited acts” requirements relating to loan payoffs and prepayment penalties. Also, HB 462 limits the corporate licensing exemption applicable to HUD-approved mortgagees, providing that a HUD-approved mortgagee is exempt from the licensing requirements of the Act only when such mortgagee (i) is approved by HUD to perform business in Kentucky, and (ii) funds or brokers a minimum of 12 FHA-insured loans on Kentucky properties each year. The exemption available to select HUD-approved mortgagees extends only to corporate licensure—“mortgage broker,” “loan officer,” and “originator” employees of HUD-approved mortgagees relying on the corporate exemption are required to become registered as such with the Department of Financial Institutions. HB 462 will become effective in July—the Department of Financial Institutions has advised us that the exact date has yet to be determined. To view HB 462 in its entirety, see http://www.lrc.ky.gov/record/06RS/HB462.htm.

COURTS

Court Holds OCC Cannot Summarily Deny Administrative Request for SARs. In a relatively recent case, the U.S. District Court for the Eastern District of Louisiana, ruling on an administrative request made to the OCC seeking a Suspicious Activity Report (SAR), overturned the OCC's summary denial of the SAR request. The court noted that OCC regulations (see 12 CFR § 4.33(a)(3)(iii)) deem SARs, like other non-public documents, to be available if the requester makes a showing that: the information is relevant to the purpose for which it is sought; other evidence reasonably suited to the requestor's needs is not available from any other source; and the need for the information outweighs the public interest considerations in maintaining the confidentiality of the OCC information and outweighs the burden on the OCC to produce the information. In the court's opinion, the OCC's summary denial of the SAR request without consideration of these factors constituted arbitrary and capricious behavior. The court therefore directed the OCC to provide the requested SAR to the court, with suggested redactions, for the court to determine appropriate disclosure. The OCC is appealing the decision to the 5th Circuit. The decision does not affect the regulatory requirement that banks deny discovery requests for SARs that they receive directly from litigants, and that they instead refer such requests to their appropriate federal banking regulator. The decision does, however, stand for the proposition that a federal banking agency that receives an administrative request for a SAR must evaluate that request under appropriate regulations and not simply reject the request. This case may well encourage other litigants to seek SARs from banking agencies through the appropriate administrative process. See Bizcapital Business & Industrial Development Corp. v. OCC, 406 F.Supp.2d 688 (E.D.La. 2005).

Court Allows Class-Wide Arbitration. On April 6, 2006, the U.S. District Court for the District of Maryland upheld an arbitrator’s decision that an arbitration agreement allowed the arbitration to proceed on a class-wide basis, notwithstanding language in the agreement prohibiting either party to participate “in any class action lawsuit . . . either as a representative plaintiff or as a member of the putative class.” The court held that the arbitration agreement prohibited only participation in class action “lawsuits.” The court reasoned further that because arbitration is not a lawsuit, the arbitration agreement did not clearly prohibit class arbitration. The court concluded that the arbitration agreement was ambiguous regarding class arbitration, and, consequently, the arbitrator did not act in manifest disregard of law in allowing the arbitration to proceed on a class-wide basis. For a copy of the court’s memorandum, see Genus Credit Management Corp. v. Jones, Civil No. JFM-05-3028, available at http://www.mdd.uscourts.gov/Opinions152/Opinions/genusmem06apr2006.pdf.

Creditors May Be Liable for Debt Collector’s Intentional Infliction of Emotional Distress. The U.S. District Court for the Southern District of Mississippi refused to dismiss a claim against Monogram Credit Card Bank and Sam’s Club, based on the two credit card issuers’ alleged negligence in supervising a debt collector. Although the court recognized that a creditor is not liable for violations of the Fair Debt Collection Practices Act by a debt collector that collects debts on its behalf, it held that the creditor could be held liable under state law theories of intentional infliction of emotional distress, if the consumers “can show that Monogram and Sam's knew how [the debt collector] was conducting itself in the process of collecting their accounts.” Freeman v. CAC Financial, Inc., 2006 WL 925609 (S.D. Miss. Mar. 31, 2006).

Kudlicki Available Online. The previously-reported Kudlicki case, in which the U.S. District Court for the Northern District of Illinois held that a lender whose solicitation letter stated, “Rates and terms subject to change at any time,” willfully violated the Fair Credit Reporting Act’s “firm offer” requirement, is now available online. See Kudlicki v. Farragut Financial Corp., No. 05-C-2459, 2006 WL 927281 (N.D. Ill. Jan. 20, 2006); InfoBytes, January 27, 2006, available at http://www.buckleykolar.com/publications/InfoBytes012706.html.

FIRM NEWS

Buckley Kolar is pleased to announce that Matthew P. Previn, previously Senior Counsel with HSBC Finance Corporation in Chicago, IL, has joined the Firm as a Partner. Mr. Previn represents financial institutions in all stages of high-stakes and class action litigation in federal and state courts, both at the trial and appellate level. Mr. Previn’s expertise includes cases arising under TILA, ECOA, FCRA, FDCPA and state unfair and deceptive acts and practices statutes. For more information, see http://www.buckleykolar.com/attorneys/mprevin.php.

On April 28, 2006, Joe Kolar was quoted in an American Banker article entitled "In Brief: Curb of Mortgage Suits Sought." The article discusses an amicus brief filed this week by Buckley Kolar on behalf of American Bankers Association, American Financial Services Association, America's Community Bankers, Consumer Bankers Association, Consumer Mortgage Coalition, Housing Policy Council of the Financial Services Roundtable, and Mortgage Bankers Association in the case of McKenna v. First Horizon Home Loan Corporation. In the brief, the trade groups urge the U.S. Court of Appeals for the First Circuit to grant an appeal and overturn the Massachusetts Federal District Court's decision to certify a class of borrowers, including borrowers who have already paid off their loans, seeking rescission under the Massachusetts Truth in Lending Act based on an alleged faulty rescission notice form. The amicus brief argues, among other things, that certification of a rescission class conflicts with TILA's cap on monetary damages for class actions, and because of the huge potential liability resulting from class-wide rescission, puts enormous pressure on a lender to settle, thus never reaching the merits of the underlying claim. The groups also argued that if rescission for paid off loans is contrary to Congress's intent of allowing rescission - which is to establish a "cooling off" period for a borrower who may have entered into a loan transaction hastily. For a copy of the article, see www.americanbanker.com (subscription required).

Jacob Thiessen authored the chapter on Banking and Financial Services in the recently published Developments in Administrative Law and Regulatory Practice, published by the ABA Section of Administrative Law and Regulatory Practice.

Joe Kolar and Jerry Buckley will be speaking at the MBA's Legal Issues Conference in Palm Desert, California, which will be held on April 30 - May 3, 2006. Jerry Buckley will be speaking about FCRA and FACTA and Joe Kolar will be speaking on Federal Regulatory Developments. For a copy of the conference brochure, including registration information, see http://www.mortgagebankers.org/files/conferences/pdf/M2602076_brochure.pdf.

Margo Tank will be speaking on electronic signature and record issues at the Association of Insurance Compliance Professionals’ Heartland Chapter’s Education Day in Des Moines, Iowa on April 28, 2006.

Andrea Lee Negroni will co-chair (with Ines Montes of Wells Fargo) a conference on Delivering Financial Services to Underserved and Ethnic Markets in New York on May 22-24, 2006. The conference is sponsored by the American Conference Institute to help financial service providers gain insight into traditionally underserved market segments. Clients of Buckley Kolar and recipients of Buckley Kolar's InfoBytes are offered a $200 discount on conference registration fees by mentioning code 881L06.S, during registration. Register by calling 888-224-2480 or online at www.americanconference.com/FSI.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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